PM maintains optimistic inflation forecast

Reuters | Sat Jul 24, 2010 | 12:09pm IST

Prime Minister Manmohan Singh on Saturday reiterated his prediction headline inflation would ease to 6 percent by December, a forecast more optimistic than that delivered by his economic advisers a day before. The prime minister’s Economic Advisory Council had said inflation would be at 7-8 percent by the year-end, compared with 10.55 percent in June, and its chairman recommended strong monetary action to tame runaway prices. Singh’s statement comes amid a growing divergence between the government and the central bank on the need for monetary tightening to cool inflation that has been in double digits for five straight months.

New Delhi puts high food prices as the cause and argues normal monsoon rains would cool inflation, while the Reserve Bank of India (RBI) says demand-side factors will continue to keep up pressure on inflation. On Saturday, Singh backed his officials’ view. "The present high rate of inflation is mainly due to food price inflation," he told a conference of top federal and state policymakers gathered to assess the country’s development plans. "The government has taken a number of steps to curb inflation. With a normal monsoon, which is the expectation at present, the rate of inflation will abate in the second half of the year."

The RBI is widely expected to raise rates by 25 basis points for the fourth time since March when it reviews policy on Tuesday and many observers see the main lending rate rising to 6-6.25 percent by end-December from 5.50 percent. Singh also called for cutting subsidies and reducing losses at state-run firms to shore up public finances needed for development. "The financing of the plan expenditure has depended far too much on debt. That must change." India plans to reduce its fiscal deficit to 4.1 percent of GDP by end-March 2013 from the projected 5.5 percent for this year and to cut its debt to GDP ratio to 68 percent by end-March 2015 from around 80 percent.